TFRIC 22: Foreign Currency Transactions

Keywords: Mazars, Thailand, Accounting, TFRIC 22, Foreign Currency Transactions, Advance Consideration, TFAC, TAS 8, TFRS PAE

22 April 2019

The interpretation applies to all foreign currency transactions that meet the following criteria:

• The transaction involves consideration that is denominated or priced in a foreign currency.
• A prepayment asset or deferred income liability is recognized prior to the transaction.
• The prepayment asset or deferred income liability is non-monetary.

According to the interpretation:

• The transaction date, for the purpose of determining the exchange rate used, is the date of initial recognition of the non-monetary prepayment asset or deferred income liability.
• If there are multiple payments or receipts, the transaction date shall be determined separately for each payment or receipt.

The interpretation is mandatory for financial periods commencing on or after 1 January 2019. Early application is permitted.

Various transition options are available:

• Retroactive application in accordance with TAS 8;
• Prospective application to all foreign currency assets, liabilities, income and expenses within the scope of the interpretation that are initially recognized on or after the beginning of the reporting period in which the entity first applies the interpretation; and
• Prospective application to all foreign currency assets, liabilities, income and expenses within the scope of the interpretation that are initially recognized on or after the beginning of the comparative period presented.

Conclusion

Currently, this standard applies only to listed or regulated companies reporting under full TFRS. If smaller entities or non-publicly accountable entities would like to adopt this standard, they must adopt and apply the full set of TFRS for Publicly Accountable Entities (“TFRS PAE”).

TFRIC 22 will have an impact on all entities applying TFRS PAE that enter into foreign currency transactions for which consideration is paid or received in advance. Applying the interpretation can be challenging for entities that enter into long-term foreign currency contracts with complex payment schedules and/or significant upfront payments.

Question

When an entity pays or receives consideration in advance in a foreign currency before receiving or delivering a monetary or non-monetary asset (such as goods or property, plant and equipment, or services) how should the exchange rate to use be determined for initial recognition of the related asset, income, or expenses on the derecognition of a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration in a foreign currency?

The interpretation of TFRIC 22 addresses the following steps:

1. Determining and specifying the type of payment or consideration received in advance in a foreign currency. Is it monetary or non-monetary, and is it refundable or non-refundable? 
2. If the amount is monetary and is refundable, the transaction in foreign currency must be converted into Thai baht at the exchange rate valid on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are converted into Thai baht at the exchange rate valid at the end of reporting period in which the entity has delivered or the goods or services to the customer or vendor.
3. On the other hand, if a non-monetary asset or liability (a prepayment or deferred income) is recognized, it is subsequently derecognized when the related asset, expense, or income is recognized. The exchange rate applied to recognize the advance consideration and to determine the initial measurement of the related asset, expense, or income (or part of it) is the spot rate for the date on which the advance consideration is received or paid. If there is more than one advance payment or receipt, the transaction date must be determined for each payment or receipt.

Example

On 1 February 2019, Company A received an advance payment of USD 5,000 from a customer for a machine, and this advance is non-refundable. The exchange rate on that date was USD 1 = THB 31. As a result, on this date, Company A has to recognize this transaction as follows:

On 15 March 2019, Company A delivered the machine to the customer, and the exchange rate on that date was USD 1 = THB 31.50. However, Company A has to reverse deferred income and recognize the income in its statement of income based on the initial exchange rate used, as follows:

However, if there is more than one advance payment or receipt, the transaction date must be determined for each payment or receipt.

If Company A signed a contract valued at USD 5,000 with the customer, and the advance payments are as follows:

The accounting records must therefore be as follows:

As noted above, as there are two advance payments, the transaction date must be determined and recorded for each advance payment. As a result, the amount of revenue recognized for each method (single payment or multiple payments) is different.

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